EU markets post steepest weekly drop this year

Bloomberg

European stocks posted their biggest weekly decline this year as a report showed the US economy unexpectedly shrank in the fourth quarter and Spain’s markets regulator lifted a ban on shorting equities.

Spanish banks led a gauge of European lenders lower, with Banco Santander SA and Bankia SA each dropping more than 7 percent. Saipem SpA plunged 36 percent — the most since at least 1989 — after lowering its earnings forecasts for last year and this year.

The benchmark STOXX 600 fell 0.5 percent to 288.2 this week, its biggest drop since the end of last year. The gauge has still advanced 3.1 percent so far this year after US lawmakers agreed to a compromise federal budget that prevented spending cuts and tax increases from coming into force.

“The US GDP report was a negative surprise that weighed on markets, but investors did calm down after the initial shock,” said Joerg Lorenz, a senior fund manager at Zuercher Kantonalbank.

The US economy contracted for the first time since the second quarter of 2009. GDP dropped at a 0.1 percent annual rate, a US Department of Commerce release showed on Wednesday. That compared with the median estimate of 83 economists surveyed by Bloomberg that called for a 1.1 percent expansion.

A report from the US Department of Labor showed that the unemployment rate increased to 7.9 percent from 7.8 percent.

A separate release showed that US house prices increased 5.5 percent in the year through November last year, their biggest year-on-year gain since August 2006.

Spanish banks slumped, with Banco de Sabadell SA plunging 14 percent and Bankia tumbling 25 percent, as the country’s stock market regulator on Thursday said that it would not extend a ban on shorting stocks.

Short-sellers sell borrowed shares with the intention of buying them back later at a lower price, a practice some politicians and investors blame for increasing market turbulence. Spain’s IBEX 35 had soared 40 percent from its low last year through Thursday.

Santander lost 7.7 percent after the country’s largest lender set aside money for further loan losses in its home market. The bank posted fourth-quarter profits of 401 million euros (US$549 million), missing the average analyst estimate of 801.6 million euros.